Peaceful polls leave insurers with billions of risk funds

MONEY MARKETS

Voters queue to cast their ballots in the March 4 elections at a polling station in Kisumu. The elections were peaceful with the Cord Coalition opting to challenge the outcome of the presidential poll in the Supreme Court. Photo/File 

By EVELYN SITUMA

IN SUMMARY

• Industry insiders said the peaceful election left the underwriters with the biggest windfall ever.
• Top on the list of big gainers was the African Trade Insurance, whose total sum assured for new covers rose to Sh20 billion in February.
• The value of political risk underwritten in the two months to election may have topped Sh120 billion.

Insurance companies are weighing what to do with the billions of shillings they collected in political risk covers ahead of the March 4 General Election that passed without the expected wave of violence.

Industry insiders said the peaceful election left the underwriters with the biggest windfall ever, forcing the managers back to the drawing board to plan on how best to make use of the funds.
Top on the list of big gainers was regional re-insurer of political risk, the African Trade Insurance, whose total sum assured for new covers rose to Sh20 billion in February.

Souvik Banerjea, a senior marketing officer at ATI, described the rapid rise in the uptake of political insurance as panic buying in anticipation of poll violence.

“There was a tremendous upsurge in purchase of political risk covers that could only be explained by panic buying,” he said.

(Read: Banks take Sh15bn cover for potential election damages)

The Independent Electoral and Boundaries Commission (IEBC) declared the Jubilee presidential candidate Uhuru Kenyatta the winner of the election on March 9, but his closest rival Raila Odinga of the Coalition of Reforms and Democracy (Cord) has rejected the results and filed a petition at the Supreme Court.

Mr Odinga’s move has effectively stalled Mr Kenyatta’s assumption of duty as Kenya’s fourth president, leaving an uneasy calm in its wake.

Many analysts expect a build-up of tension towards the end of the month when the Supreme Court is expected to deliver its verdict on the petition despite Mr Odinga and Mr Kenyatta’s promise to respect the court’s decision.

Uncertainty remains as to how their supporters will react to the judgement given the hard positions both sides have taken on the outcome of the poll.
But a number of insurance firms are already weighing their options. ATI said it was considering investing the money in its reserve, guaranteeing it availability of the funds for future claims.

“Most of the money that the insurance companies collected will go towards building their reserves said Tom Gichuhi the chief executive officer of the Association of Kenya Insurers (AKI). “This is because the cover goes beyond elections to other risks that are political in nature.”

Mr Sourvik estimates that local insurance companies signed political risk covers whose sum assured was five times the Sh20 billion that his company handled, giving them the opportunity to boost their reserves by an even larger margin.

That means the value of political risk underwritten in the two months to election may have topped Sh120 billion. Insurers, however, put the figure at slightly below ATI’s estimate arguing that some of the risks were shared out.

Re-insurers offer a critical role in the underwriting business, providing the back-up that local insurance companies may need in the event of massive or numerous claims arising from a special situation such as political turmoil.

In ordinary language these are the insurers of insurance companies that often operate on bigger reserves, built over time giving them the ability to deal with big claims. As a precautionary measure, local insurers also ship part of their businesses abroad through existing treaties and trade agreements.

Currently, most Kenyan insurance companies have low reserves, a factor that limits their capacity to underwrite big risk. Last year 22 companies tried to pool resources to enhance their capacity but the outcome of that effort remains unknown.

ATI said it had underwritten big risk companies in Kisumu, Mombasa, Eldoret and almost every company in Nairobi’s industrial area.
The multilateral insurer took up risks priced at more than Sh150 million with the help of a London underwriter leaving mid-sized companies with risks priced at below Sh150 million to local insurers.

One of the five major big political risk underwriters told the Business Daily that it did brisk business as commercial entities and individuals rushed to take political covers in the run-up to the election. That rush also pushed up the value of premiums, said our source.

Analysts expect the excitement to die out after the polls, forcing the business to go back to its usual low activity run, making the use of the windfall funds critical in the long term.

Last year, ATI had in its books a sum assured of Sh41 billion, which Mr Sourvik hopes will be renewed this year.

Political risk cover is a short-term insurance cover lasting one year and although it covers a number of politics-related disruptions like violence, property destruction, mutiny and terror attacks,

Mr Gichuhi’s prediction is that companies that took the cover only to secure the business during the poll period, may not renew the covers in non-election years.

Unlike life insurance which is run as a fund, political covers cannot take such an approach because of the high cost of the risks insured. Companies pay lesser premiums compared to the actual worth of the risk because it has no definite or guaranteed claim. This makes it necessary and convenient for clients to pay annually.

“As long as insurance companies will continue to receive the premiums yearly, it helps build their reserves,” Mr Gichuhi said.

Mr Sourvik said that if ATI was to pay massive losses in future, it would need 200 years’ worth of premiums to settle the claims.

esituma@ke.nationmedia.com